Summary

REITs have been on a bit of a roller-coaster ride but nothing that wasn't expected in a rising rate environment.

Leadership within REITs had shifted noticeably to Retail REITs.

Mortgage REITs have been hurt recently but have performed well despite rate increases.

After over a month long hiatus, HOTREITs is back. If you missed it, it was because I did such a poor job of announcing that my wife and I relocated to Nashville, Tennessee. Busy with selling a house, enrolling my daughter in school, renting an apartment while we look for a house, and opening a new office, needless to say, some things fell through the cracks.

But I am happy to say, we're in Nashville now y'all.

REIT performance has been a bit up and down but generally positive over the last 3 months. Regional Malls and Shopping Centers exploded last month with 12.4% and 10.3% returns respectively, and even the poor performing sub-sectors generated positive returns. The worse performing sub-sector over the last 3 month period was Timber, but it had been one of the best performers over the last 6 month period, outperforming the MSCI US REIT Index (RMZ) by over 11% and besting the S&P 500 (SPY) by 2%.

Lodging REITs have also bounced back with a 14% return over the last 3 months and are now up 8.3% YTD. The chart below shows the importance of diversification and slight tilts depending on economic trends. Not long ago, Data Centers and Infrastructure REITs were the top performers, but while Infrastructure REITs have held on, Data Center REITs are down 10.5% over the last 6 months. QTS Realty (QTS) was the big drag on the sub-sector's performance but even darlings like Digital Realty Trust (DLR) and CoreSite Realty (COR) were down 5.4% and 6.5%, respectively, over the last 6 months.

Interestingly, the Top 5 performers over the last month were in the Retail space, long thought to have been DEAD. That is, except Wheeler (WHLR), which investors seem to have left for dead.

Performance as of 04-30-2018:

Returns as of 6/18/2018

Note: Returns are based on the average returns all REITs within each sector. Not market-weighted.

Top and Bottom Performers

1 month Returns ending May 2, 2018

Top 5

Bottom 5

REITonomics

The economic environment seems to be humming along and despite some indicators pointing to potential headwinds, the overall economy is still growing despite Fed rate hikes that so far have been quite benign.

Core CPI/PPI

There is certainly some inflation creeping in to the system as evidenced by PPI outpacing CPI, but neither indicator is at dangerously high levels nor spiking to levels indicative of inflation spikes. Since the middle of 2017, both CPI and PPI and steadily accelerated and PPI is now just below 0.3% on a month to month basis. Core CPI, on the other hand, has broken through the 2% barrier again – as it did in late 2015 and early 2016 – and I'll point out that the recent spike has been much steeper than it was last time. It remained in the 2.2% to 2.3% range for over a year before falling below 2% again in early 2017.

Whether the trend is continued acceleration is yet to be seen and the Fed has been wary of inflation getting out of control – hence the rate hikes. REITs may have already taken the worst of it and if the economy continues to expand, real estate should perform well. I can tell you that prices in Nashville don't seem to be slowing down and demand for housing is so high, we have been too slow to make an offer on houses that met our criteria. In some cases, houses were under contract the same day they went on the market. So, watch out for inflation in housing.

FED Funds Rate

As I mentioned earlier, the Fed has been raising rates in anticipation of inflation and not necessarily due to current inflation. The Fed Funds rate now stands at 1.75% and as the chart below shows, the rate has risen dramatically since late 2015 but is still low by historical standards.

Core Retail Sales

Part of the reason for the strong performance of Retail REITs in both the Regional Malls and Shopping Center sectors is because of the continued strength in retail sales. This sector is ripe for asset allocation as some retail centers have been more internet resilient than others and some REITs have been much more aggressive and successful at shifting their strategy to take advantage of consumer trends AND protect against online competitors.

Both core and overall retail sales have been positive over the last few quarters and despite internet sales continuing to outpace brick and mortar sales, they still only make up a fraction of overall sales. The strong job market is likely to continue to drive sales as consumer discretionary income rises.

Initial Jobless Claims

Initial claims remains in the low 200K range and unemployment (not shown) remains below 4%. The bottom line here is that consumers have the means to keep spending.

Michigan Consumer Expectations

In line with initial claims is the University of Michigan Consumer Sentiment index, which despite being below its recent high, remains elevated. This indicator is typically a good lead indicator of consumer spending which for some time had predicted a rise in retail sales that didn't occur. We are starting to see that confidence translate into spending as consumers feel more comfortable in their jobs, even has wages have only begun to rise.

Baker Hughes Oil Rig Count

Unrelated to real estate directly but a factor when it comes to consumer sentiment and spending is the level and direction of oil prices. While prices have risen to $70 a barrel, so too have the number of oil rigs in operation. The chart below highlights the strong correlation between oil prices and oil rigs in operation as higher prices cause drillers to deploy more resources. The advances in fracking and the ability for oil drillers to efficiently deploy additional rigs puts a lid on oil prices as does OPEC's ability to increase production – or rather – remove restrictions on production.

So long as oil and gas prices remain at manageable levels consumers will likely remain bullish on their own situations. Who knows, maybe those with short memories will go back to buying the big gas-guzzling SUVs that were the big trend back in the late 2000s. Fortunately, many of those vehicles are much more fuel efficient these days and there is a broad interest in energy efficient cars that should also help put a cap on oil prices.

Select News Highlights

Please note these are highlights and have not been further analyzed beyond announced figures.

Pebblebrook (PEB) revised its bid for LaSalle (LHO) putting it head to head with Blackstone (BX) with a bid that was 13% over LHO's agreement with Blackstone. Management is siding with Blackstone's offer saying that Pebblebrook's offer is substantially similar to the one made last month and that is was still inferior to Blackstones.

Jernigan Capital (JCAP) took a 5% hit after it started an IPO for 3.5M shares. It fell further after it upsized the offering to 4M shares at $18.50. It later reported a total of 4.6M shares sold.

Education Realty Trust (EDR) is an acquisition play as Greystar offered $41.50 per share. There were rumors since June 1 about a possible sale, which caused the stock to spike from $36.

Healthcare Trust of America (HTA) is being targeted by short seller Spruce Point Capital. HTA is in our Low Vol REIT portfolio so this is something of concern if nothing more than the headline risk. Shares fell 1.2% on Friday and have declined 5% over the last month. The concern from Spruce is that performance is too smooth and that it must be due to management finagling of the numbers. We are keeping a close watch on this one.

Analyst Upgrades/Downgrades

Upgrades

Evercore upgraded both Brixmor Property (BXP) and Vornado (VNO). Brixmor was upgraded to a price target of $19 from $18 while Vornado was increased $1 to $78

On the horizon is an overview of the Office REIT sub-sector, which has lagged the broader REIT index and is now facing additional challenges. I'm also working on an article on Cousins Properties (CUZ), which should be released soon in our Premium service.

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